Philippines Capital restructuring
Norma Margarita B Patacsil, Aris L Gulapa and Pamela Joy L Alquisada of Caguioa & Gatmaytan assess a recent Philippine court interpretation’s effect on foreign investments
F
oreign investors in partly nationalised activities in the Philippines have previously resorted to seem- ingly permissible – at least in practice – structuring options to comply with nationality restrictions imposed by Philippine law. To avoid breaching the 60%-40% Filipino-alien equity ratio required
in many partly nationalised activities, a common shareholding structure was the issuance of non-voting preferred shares to foreign investors. The recent Supreme Court case of Gamboa v Teves (G.R. 176579, June 28 2011 (main decision) and
October 9 2012, (resolution on the motions for reconsideration)) has changed the structuring landscape. In Teves, the Supreme Court interpreted the 60%-40% Filipino-alien equity ratio/requirement in partly nationalised activities as applying to each class of a corporation’s shares. With this development, compa- nies engaged in partly nationalised activities which have foreign investors will be constrained to restruc- ture their shareholding to avoid breaching Philippine law, and accordingly foreign investors will have to consider certain rules affecting their restructuring exercise.
Defining capital in foreign investments Article XII, Section 10 of the 1987 Philippine Constitution states that Congress may, upon recommen- dation of the economic and planning agency and when the national interest dictates, reserve certain areas of investment to citizens of the Philippines or to corporations or associations at least 60% of whose cap- ital is owned by such citizens, or such higher percentage as Congress may prescribe. Republic Act No. 7042, or the Foreign Investments Act (FIA), enacted in 1991, implemented this Constitutional provision. Under the auspices of the FIA, the President of the Philippines must, every two years, issue the Foreign Investments Negative List (FINL) which sets out wholly nationalised (where no foreign participation is permitted) and partly nationalised (where foreign participation is permitted but limited) activities in the Philippines. Section 3(a) of the FIA defines the term ‘Philippine national’ as: (i) a citizen of the Philippines; (ii) a
domestic partnership or association wholly owned by citizens of the Philippines; (iii) a corporation organ- ised under Philippine law of which at least 60% of the capital stock outstanding and entitled to vote is owned and held by citizens of the Philippines; or (iv) a corporation organised abroad and registered as doing business in the Philippines under the Philippine Corporation Code, of which 100% of the capital stock outstanding and entitled to vote is wholly owned by Filipinos or a trustee of funds for pension or other employee retirement or separation benefits, where the trustee is a Philippine national and at least 60% of the fund will accrue to the benefit of Philippine nationals. Nonetheless, where a corporation and its non-Filipino stockholders own stocks in a Securities and Exchange Commission (SEC)-registered enterprise, at least 60% of the capital stock outstanding and entitled to vote of each of both corporations must be owned and held by citizens of the Philippines, in order for the corporation to be considered a Philippine national. Ascertaining the nationality of a corporation for purposes of participating in a wholly or partly nation-
alised activity begins with the term ‘capital’. Over the years, there have been conflicting opinions as regards the proper construction of the term. Such conflicts should now be deemed to have been settled by the Supreme Court’s decision in Teves. The principal issue in Teves was whether the entirety of a corporation’s outstanding capital stock should be considered in determining its nationality for purposes of participat- ing in wholly or partly nationalised activities. The petitioner there argued that ‘capital’ should be inter- preted to refer only to such stock entitled to vote for the board of directors, because only such class of stock effectively exercises control over the corporation. The Supreme Court agreed with that interpreta- tion and held that in determining a corporation’s nationality for purposes of participating in wholly or partly nationalised activities, only such capital stock entitled to vote or elect for a corporation’s board of directors shall be considered; thus, the percentage limits for foreign equity indicated in the Constitution, and also the FIA and FINL, should be applied only to such class of stock and not to the corporation’s total outstanding stock.
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“
Congress may
reserve certain areas of investment to Philippine citizens
” IFLR|FOREIGN DIRECT INVESTMENT 029
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